Real Estate Blog of Larry Wenglin

My last post explored what constitutes a valid signature on a contract. In this post, I focus on when a signed contract to sell real estate is enforceable.

Most real estate transactions in Massachusetts start with an Offer to Purchase (“OTP”). The buyer signs the OTP and writes an escrow deposit check. After some negotiation, both parties sign the final version of the OTP. Most real estate agents in Massachusetts use a version of the Greater Boston Real Estate Board’s “standard” form. In the section entitled “Riders,” buyers usually reference an attached mortgage contingency and an inspection contingency. For condominiums, buyers also normally write in a contingency to review the “condominium documents.”

The buyer’s legal obligations
Paragraph 5 of the standard offer states that if the buyer does not “fulfill his obligations,” the worst that can happen is the loss of the initial deposit, usually $1,000. In my experience, buyers very rarely lose their initial deposit. I have never heard of an instance where a buyer had a good faith reason for changing her mind and did not get her deposit back. If the buyer makes a sincere attempt to purchase the property, sellers generally agree to return the deposit if the deal falls apart. It is bad business for a seller to try and hold a buyer’s deposit. The only real damage to the seller is loss of market time. A buyer has to behave extremely badly for a seller to consider retaining a deposit.

The seller’s legal obligations
On the other hand, the OTP is binding and enforceable against a seller. The seller’s only obligation specifically articulated in the standard OTP is in Paragraph 3, which says that both parties “shall sign” a purchase and sales agreement (“P&S”) at some point, generally within two weeks. Real estate and contract law requires that both parties act in “good faith” during the course of the contract, which includes bargaining over the terms of the P&S. Although “good faith” is subjective, a seller cannot change his mind about the deal because he just got a better offer or he just no longer likes the basic terms and conditions. If the seller backs out of the deal, and the buyer files a successful lawsuit, the seller will be required to sell the property to the buyer.

Whether you are a buyer or a seller, do not enter into a real estate transaction lightly. You should have the intention of doing what you can to make it work. Buyers have several avenues of escape if the deal no longer makes sense. Sellers, however, are basically locked in unless the buyer becomes unreasonable.

* In most cases, just because the buyer can’t get the deposit back doesn’t mean that the seller automatically gets it. The deposit is initially stuck in the agent’s escrow account. The seller cannot receive the deposit until the escrow agent obtains the consent of both parties. Initially, this can prove difficult. Most often, the parties eventually agree to some compromise based on the threat of litigation and the trouble and time related to fighting over $1,000. I have also seen the parties simply fail to come to an agreement and the money never released.

This week’s post is courtesy of negotiation consultant and blogger, Chad Ellis.

During a recent family visit my father reminded me of an unusual house near where I grew up. It was a lovely house with a good-sized yard next to a pond. Perfect for a family, and many families happily bought it. In fact, the house was bought by a new family almost once a year, for what always seemed a bargain price. Most families sold the house within a year of moving in.

Nothing was wrong with the house, per se. The problem was that the yard and pond were the summer home for a large flock of geese. During the warm season they would arrive and spend the next few months defecating all over the yard, turning what looked like a dream into something quite less pleasant. When the geese had gone, the new owners would look at their mess of a yard, clean things up as best they could, and put their lovely house on the market.

In my last post we discussed the importance of information. Clearly the buyers of this home lacked a key piece of information. But why? Buying a home is a big deal — for most of us it’s the biggest purchase we’ll ever make. Paying 10% more than you have to is a huge loss as is buying a house you decide you can’t keep. Even without the Internet making research fairly easy, it would have been relatively easy for home buyers to learn about the history of the Goose House. So why didn’t they?

In my experience, there are two reasons people enter negotiations without key information. First, we don’t make a list of what information we’d like to have. Second, we become extremely reluctant to ask questions.

If anything, this problem escalates with major purchases. The same person who will check movie reviews before putting $10 and an evening at risk will do little or no preparation when buying a house or negotiating salary at a new position. Having more at stake sometimes makes us less willing to prepare, perhaps because it’s more frightening to admit a lack of knowledge when it comes to something important. If this sounds like you, make extra certain that you commit to asking the sorts of questions we discussed last time. Then, when you consider about how you might go about acquiring that information, be aware of the options that make you uncomfortable — and spell out the costs and potential gains of that option. An experienced buyer’s agent you trust can help you to identify the tough questions you need to ask and will know how to ask and where to look to get the answers.

If the buyers of the Goose House had done that, they might have learned about the house’s history…and avoided a costly mistake.

In my last post, I recommended a useful context to make home inspection issues easier to negotiate for both parties. Buyers, however, still need to make sure that they get a thorough and fair home inspection. Home inspectors are subject to a license requirement, a code of ethics, and standards of practice from the Board of Registration of Home Inspectors, but their results still vary widely. In my experience, multiple home inspectors inspecting the same property are likely to find very different issues. How can you assess your home inspector?

Home inspectors often fall into three different categories. First, there is the highly critical inspector. Real estate agents often refer to these inspectors as “alarmist,” while many consumers merely consider them “tough.” A highly critical inspector can be a good choice if the buyer can maintain perspective. If you are somewhat savvy about home construction issues and not easily alarmed, this type of inspector may be fine for you. However, be wary of the home inspector who thinks it is his or her job to be negative. A home inspector who tells you the roof is “fully depreciated,” but fails to give you an opinion on its condition given its age, is doing you a disservice. A roof that is past its normal life span, might still be in reasonably good condition and last a few more years.

The second category of home inspectors falls on the opposite end of the spectrum. These inspectors tend to minimize issues and accentuate the positive. Real estate agents often regard these inspectors as “easy.” Beware the inspector who just gushes nice things about the home. He is mostly trying to stay in good graces with the real estate agent and doesn’t want to offend anyone. If you find yourself in the middle of a home inspection with this type of inspector ask him to be more critical and to provide you details and specifics about the systems he is inspecting.

The vast majority of home inspectors fall into the last category. These are the home inspectors that real estate agents regard as “fair.” They will give you a reasonably balanced assessment of the home as whole, yet still uncover critical issues. The key to getting the most value from this type of inspector is twofold. First, ask a lot of questions and figure out what the inspector knows and doesn’t know about the systems he is inspecting, and his experience with those systems. Second, if he finds any issues of more than minor concern, hire a true expert to take another look at those issues. For example, if the inspector raises concerns about the roof, hire a roofer to look it over. This last tip is important no matter which category your inspector falls into.

Never stop being a good consumer. Hire a home inspector who comes referred by someone you trust, ask lots of questions, and don’t forget to actually read the report. If you don’t understand something about the report, ask more questions. For more information about home inspectors, click here.

In my experience, the home inspection is at the fulcrum of the residential real estate transaction. If a deal is going to sour, it is likely due to the home inspection. Although not required by laws or regulations, home buyers in Massachusetts almost always have a home inspection and the right to cancel the transaction if they are dissatisfied with the results.

Most buyers start the buying process thinking that the home inspector will find all the issues including what is not functioning properly and what may need attention in the near future. Buyers assume they’ll have the agent negotiate with the sellers to fix the problems or compensate the buyer in some way.

Sellers usually have a different perspective. They often feel that the issues are to be reasonably expected given the age and general condition of the home or should have been obvious to the buyer from the start. In the sellers’ minds, the house comes “as-is” and the price has already been negotiated. After all, the sellers have lived with the issues for some time.

These very different approaches can make for difficult negotiations over issues that actually don’t involve a great deal of money. The solution is a different context for the home inspection.

Buyers will benefit most by using the home inspection to determine whether the home generally meets their expectations and if they want to proceed with the purchase. It is best if buyers focus on specific problems that were unknown prior to negotiating the sale price. What doesn’t function properly given the age of the renovation, or the home, and the general condition of the house? Reasonable wear and tear is to be expected. If an item is past its life expectancy and still works, then it is actually functioning better than expected.

The buyers and their agent should present the seller with a reasonable dollar amount for fixing the problems (I generally recommend against asking the sellers to make repairs because the buyers will have to inspect the work and this opens up a new set of problems). The sellers ought to approach the buyers’ requests essentially the same way. If the buyers could reasonably have expected the item to function properly, and it doesn’t, then the buyers request for compensation is reasonable.

There will still be complicated issues to resolve around what is reasonableness. However, if buyers and sellers approach the home inspection from the same context, those issues should be easier to resolve.

I recently spoke with a man whose parents owned a residence in Boston. His parents were considering selling their home and he indicated that, once they made a decision, they would contact me. This approach is a great example of a missed opportunity. If his parents already have a relationship with an agent they trust, they have an excellent opportunity to get some high quality free advice and consultation. If his parents don’t have an agent, they can evaluate the agent’s services on a trial basis and possibly get free advice and consultation.

The greatest value of having a relationship with a real estate agent you can trust is that you can consult with him or her regarding major real estate decisions. For a seller, what decision is more important than the initial decision to sell? Even a seemingly simple situation can actually be quite complex. For example, suppose you are transferred to the west coast. Do you need the equity out of your home so you can purchase in California? Should you rent out there first? What are the implications of renting your home here? How solid is the current market and how confident are you that the real estate market will get better for sellers, stay the same, or get worse? And how does all of this factor in to your decision?

Consulting with an agent regarding your decision to sell reveals the ability of your agent to objectively analyze your situation and offer sound advice. A good agent with a consultative approach can assist in fully analyzing and synthesizing all the different factors to help you make a powerful choice that furthers your goals.

Many people, however, make these decisions without expert advice, because they are uncomfortable bringing in an agent to help them. This is understandable. They don’t have a real estate agent they can trust. Because agents work on commission, they naturally have a bias in favor of wanting you to sell. It is difficult for them to be completely objective in their analysis and advice. However, at some level, almost all professionals have a personal financial bias. It all comes down to trust. Can you trust that your real estate agent has enough integrity to keep your interests truly in mind and be as objective as possible?

Your agent’s trustworthiness will be put to the test by consulting with him or her regarding the decision to buy or sell. The primary piece of information that you probably need, if you are thinking of selling, is an accurate picture of the value of your home. Most agents offer this analysis without charge. Not surprisingly, the raw data is subject to interpretation and the final value is more art than science. Agents are often overly optimistic about the value of your property. You want the home to be worth as much as possible, and the agent wants the business. An experienced agent, who understands the market, and is good with the numbers, is the starting point. Only an agent you trust, and one who really understands the value of a long term agent-client relationship, can give you a truly honest appraisal of your home’s value. If you already have an agent you trust then this information will be very valuable. If you are working with an agent who is new to you, vigilantly check your agent’s references and consider how much you trust the agent before making any decisions. If you feel that the agent has genuinely assisted you in the decision-making process, and there is a foundation of trust, even if you decide not to sell in the current market, you have found the right agent. {Please Comment Here}